The economic recession (possibly depression) was largely caused by the sub-prime mortgage mess. The problem with sub-prime mortgages, which seems to be rarely discussed, is the fact that the mortgage payments are initially very low. After a period of time, usually a few years, the rate resets to a much higher mortgage payment. Because the mortgage holders are sub-prime, they are unlikely to be able to afford the radical jump in price.
However, this problem is not restricted to only sub-prime mortgage holders. Many Americans and US residents have option adjustable rate mortgages (ARMs) which work the same way. In Bloomberg, there was a story about a lady whose payments, for instance, will balloon from $95 a month to roughly $3500 a month. There are an estimated one million homes in the US that are backed by an ARM - although most won't have such payment plans. To get an idea of the scope of this problem, one must look at a graph of the reset in payments. This is graph which shows how much, in billions of US dollars, Americans' mortgage payments will increase collectively:
The green bars represent the sub-prime mortgage resets. As can be seen, there was a peak in these resets in early to middle 2008 which is when the housing crisis began to become quite severe. However, by the end of 2008 and early 2009, there quickly became very few (relatively speaking) mortgage resets and they weren't as severe collectively. This allowed there to be a bit of a slowdown in the collapse of the housing market and allows there to be a bit of a lull. There are even signs that the housing market is picking up, albeit quite slowly.
However, if one looks further to the future in 2010-2012, we can easily notice that the situation will re-emerge and can be even worse. The scope of the mortgage resets is on an even longer time scale and the peak is higher. All of these resets will increase the cost of owning a home and will quickly drain billions, and then tens of billions, of dollars from people's pocketbooks every month. That's money that won't be able to be spent on purchasing goods. Given that 70% of the US economy is driven by consumer spending, this will most likely cause significant stress on an already weakened national economy.
The ARM resets likely won't be as bad as it was with the sub-prime mess because many who had sub-prime mortgages were unable to pay the increased bills as they often had "liar loans". This allowed them to overstate their income and get a loan which they couldn't afford, leading to foreclosure. For most with ARM's, they normally have enough cash to make it through the increased payments; however, it will significantly cause hardships for them and could stall any major economic recovery that may begin to occur this year and early next year.
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Comments: 8
People are economically disadvantaged in this country as can be seen from the myriad of comments. Add a touch of apathy and you have America.
Okay, these people got taken. Whose fault is that, really? The loan sharks? The politicians? The educational system? Maybe it would better to prepare these suckers with a common, easy-to-understand formula. If you need a dollar to buy a nickel's worth of candy...you better count your pennies and go candyless!
It's really hard to say they were "taken". They signed their name on the dotted line. They should know what they are signing. Many of them were greedy and short-sighted, thinking that they could either flip the house in a year or refinance in a year before the resets occurred.
Not that it absolves the banks either. They should suffer their losses on their merits. If they were interested in earning money honestly, rather than through the government bailout program, they should have (and easily could have) made the payment numbers very accessible so that everyone knew precisely what they were going to be paying, which would make it a lot easier for people to be able to pay those payments and not be foreclosed on or be stressed too badly.
Nasr, let's face some hard cold and unhappy facts. MANY of these people were completely scammed into these mortgages by unscrupulous sellers/providers looking for commissions knowing the loan would soon be sliced, diced and sold. That's the hard truth.
The word was out. Sell loans. There were people going door to door in neighborhoods selling loans. They were using every lead generation method known to man to get warm bodies into their offices. They cold called people using phone books! Geez, man, this was a huge scam.
Sure, many of them were. But most of them weren't. They had good credit ratings and thus they likely know a good amount about their own finances and the steps they should have taken before making a purchase.
Anyway, I don't see how rehashing this debate really changes the outcome. I didn't mean for this to get into the ethics or blame of the situation but instead to dive into the details further than what other people have discussed so far in the MSM. Since the subprime mess has largely passed and housing seems to be bottoming out, this is an issue that's being ignored. However, I'm trying to bring to light data that isn't being discussed and, in my amateur opinion, could be very devastating economically or at least quite painful to a recovery.
Well then, the option ARMs were something many of us, like you, factored into the equation and I don't think we'll see a real economy recovery anytime soon in spite of what the mainstream media says.
There's also the commercial side to consider, which is typically poised to hold out longer than the average underwater homeowner that's about to default.
So what do you think we'll see in regard to the commercial side? I see a great many empty stores at the large mall near here, Mall Of America. The second largest mall owner in the US filed for bankruptcy recently. There are strip malls lacking leases all over the country. They can't hang on forever and even a slow recovery, which I don't think we'll see anytime soon, won't allow them to hang on forever.
Some of the economists I follow predicted a commercial real estate crash mid-2009. We're almost there.
Lastly, and although this isn't directly related it's still part and parcel of the entire economic picture, what's your opinion on the oil bourse Iran expects to open with Iranian oil denominated in Euro's. That doesn't play well for US economic recovery either.
On one hand, I want to say "consumers beware. it's nobody's fault but yours." But on the other hand, when the sales people are hiding truth from you, I'd say we need a better set of regulations and a good enforcement.
But the bottom line is this: If you can't understand what's in the contract, just get away from it until you are completely satisfied that it's a good product. If you believe the service/product offered is too good to be true (like these option ARMs), it probably is. If you can't afford to take the risk by over extending your finances, they get a 10 foot pole.
Caveat emptor.
Wow. Astronomical stats.